Author Topic: Life insurance: What is your Mustacian logic for having or not having it?  (Read 75305 times)

barbaz

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Life Insurance is useful in some rare circumstances. It IS mustachian to use it after calculate the cost/benefit and take decision. As csprof said, it is an edge against a low-probability but high-cost event.
Right? Its almost as if this entire flamewar thread could be replaced with a calculator.

Torran

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Finding this really interesting. I've just bought a flat and the mortgage provider are pushing hard for me to take on critical illness/life insurance.

I have student loan debt of £9000. And obviously the mortgage. But nobody depends on me financially. So, if I died tomorrow I kinda just think my parents would sell the flat and that would pretty much wrap up my finances. In Scotland my student loan would be written off if I died.

I think it's a bad idea to pay out for insurance. This thread is really helping to see how others with a more mustachian mindset feel about it.


Proud Foot

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I think there are too many variables to make a flat statement of term life insurance being good or bad.  I think nearly everyone here would agree that whole life is a bad choice. 

My wife and I both have term life insurance on ourselves.  With a currently negative net worth and toddler it is important for us to have the insurance in the event either one of us passed away.  Her coverage is enough that I would be able to pay off all our debts, pay for a funeral, and have enough left over to help support a few months as I adjusted to living off my income.  My coverage is a lot higher as I make a lot more than she does and she is currently taking classes part time with the goal of going to PA school in the next 2 years.  The amount we chose for me would pay off the debts, the funeral, and provide living expenses until she completes PA school and is able to make more.  We chose short terms as we each would be able to earn enough to support ourselves and our child(ren) off one income once she is a PA. We will most likely not renew the policies once we reach the end of the term.

BlueMR2

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I have the insurance provided automatically through work.  It's enough to bury me.  Even that is unnecessary.

We've never had life insurance beyond that.  There's no point for us.  Either one of us could continue to live on our own income.  We have no dependents to worry about.  It just seems silly to throw money at something where odds are we'd end up getting a smaller lump sum back in the future, when we have no need of that lump sum.

PhysicianOnFIRE

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Family of 4, single income. I carried $1 million term life insurance on myself for 8 or 9 years. Hit FI and stopped paying the premium a year or two before the 10-year policy expired.

Disability has been dropped as well. If I would have been thinking and paying closer attention, I could have reduced the disability coverage on the way to FI. WCI had a well-written guest post on this topic.


Vagabond76

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I think nearly everyone here would agree that whole life is a bad choice.

See my post on my whole life policy. If people would put their biases aside and do the calculation, they would see the policy I have as the equivalent of a low-cost, 6-8% per year tax-free, savings account. But most people won't put their biases aside and just consider me to be an idiot.

ender

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I think nearly everyone here would agree that whole life is a bad choice.

See my post on my whole life policy. If people would put their biases aside and do the calculation, they would see the policy I have as the equivalent of a low-cost, 6-8% per year tax-free, savings account. But most people won't put their biases aside and just consider me to be an idiot.

You don't have nearly enough detail in your previous post to have determined if it was a good financial decision.

  • What is your premium?
  • How much have you paid into the insurance historically?
  • How long have you had the policy?
  • What is your current cash-value?

People on here hate it when I explain how good our whole life policies are.  We own two, one on me and one on her:

$250k initial death benefit, $626.20/mo for 60 months.  It will be paid off in October this year.
The death benefit grows every month.
The cash value credits at 6.5% to 7.5%, with a minimum of 4% growth.
The cumulative administrative expenses (excluding the cost of insurance) over those five years is .29%, or about the cost of an index fund.
The expenses are fixed at $110/year, but the cash value will continue to rise, meaning the already low expenses will approach zero.
The other expense is the cost of the insurance, which is about $114/year.
The cash value builds tax-deferred, but I can take out what I paid into it tax-free.
All proceeds are tax free if used for long term care or if the beneficiaries take it when I croak.

In sum the benefits are:  low cost (and getting lower), tax-deferred growth, guaranteed growth, three options for tax-free withdrawals.

beltim

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I think nearly everyone here would agree that whole life is a bad choice.

See my post on my whole life policy. If people would put their biases aside and do the calculation, they would see the policy I have as the equivalent of a low-cost, 6-8% per year tax-free, savings account. But most people won't put their biases aside and just consider me to be an idiot.

You don't have nearly enough detail in your previous post to have determined if it was a good financial decision.

  • What is your premium?  1
  • How much have you paid into the insurance historically? 2
  • How long have you had the policy? 3
  • What is your current cash-value? 4

People on here hate it when I explain how good our whole life policies are.  We own two, one on me and one on her:

$250k initial death benefit, 1: $626.20/mo  2,3: for 60 months.  It will be paid off in October this year.
The death benefit grows every month.
The cash value credits at 6.5% to 7.5%, with a minimum of 4% growth.
The cumulative administrative expenses (excluding the cost of insurance) over those five years is .29%, or about the cost of an index fund.
The expenses are fixed at $110/year, but the cash value will continue to rise, meaning the already low expenses will approach zero.
The other expense is the cost of the insurance, which is about $114/year.
The cash value builds tax-deferred, but I can take out what I paid into it tax-free.
All proceeds are tax free if used for long term care or if the beneficiaries take it when I croak.

In sum the benefits are:  low cost (and getting lower), tax-deferred growth, guaranteed growth, three options for tax-free withdrawals.

1,2,3 are given in the text.
4. is calculable from the data given

ender

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I think nearly everyone here would agree that whole life is a bad choice.

See my post on my whole life policy. If people would put their biases aside and do the calculation, they would see the policy I have as the equivalent of a low-cost, 6-8% per year tax-free, savings account. But most people won't put their biases aside and just consider me to be an idiot.

You don't have nearly enough detail in your previous post to have determined if it was a good financial decision.

  • What is your premium?  1
  • How much have you paid into the insurance historically? 2
  • How long have you had the policy? 3
  • What is your current cash-value? 4

People on here hate it when I explain how good our whole life policies are.  We own two, one on me and one on her:

$250k initial death benefit, 1: $626.20/mo  2,3: for 60 months.  It will be paid off in October this year.
The death benefit grows every month.
The cash value credits at 6.5% to 7.5%, with a minimum of 4% growth.
The cumulative administrative expenses (excluding the cost of insurance) over those five years is .29%, or about the cost of an index fund.
The expenses are fixed at $110/year, but the cash value will continue to rise, meaning the already low expenses will approach zero.
The other expense is the cost of the insurance, which is about $114/year.
The cash value builds tax-deferred, but I can take out what I paid into it tax-free.
All proceeds are tax free if used for long term care or if the beneficiaries take it when I croak.

In sum the benefits are:  low cost (and getting lower), tax-deferred growth, guaranteed growth, three options for tax-free withdrawals.

1,2,3 are given in the text.
4. is calculable from the data given

So if I understand this means:

  • Total premiums = $626.20 * (60 - 5) = $34,441 total paid
  • $110/year in expenses = about $500 total expenses
  • $114/year in insurance cost ($9.50/month) = $9.50 * (60 - 5) = $522 total premiums
  • Current cash value = about $35,000 (depending on interest rate)

Am I understanding this all correctly? So the current value is roughly $35k?

Vagabond76

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So if I understand this means:

  • Total premiums = $626.20 * (60 - 5) = $34,441 total paid
  • $110/year in expenses = about $500 total expenses
  • $114/year in insurance cost ($9.50/month) = $9.50 * (60 - 5) = $522 total premiums
  • Current cash value = about $35,000 (depending on interest rate)

Am I understanding this all correctly? So the current value is roughly $35k?

There are six months left.  I've paid in $33,814.80.  The current cash surrender value is $37,0457.74.

ender

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So if I understand this means:

  • Total premiums = $626.20 * (60 - 5) = $34,441 total paid
  • $110/year in expenses = about $500 total expenses
  • $114/year in insurance cost ($9.50/month) = $9.50 * (60 - 5) = $522 total premiums
  • Current cash value = about $35,000 (depending on interest rate)

Am I understanding this all correctly? So the current value is roughly $35k?

There are six months left.  I've paid in $33,814.80.  The current cash surrender value is $37,0457.74.

If you would have invested that same amount of money into an SP500 index monthly during that timeframe and bought a $10/month $250k term policy instead, you would have about $41,000 now. This represents an opportunity cost of about $4,000 to have that whole life policy, since you purchased it.

I couldn't find SP500 divided reinvested monthly return data to use, though, so I just used the SP500 monthly return data. If you were to include divided reinvestments the opportunity cost gets higher.

And in the off chance you aren't fully using tax advantaged space (401k, IRA, 403b, HSA, etc) this is considerably worse as you are also paying taxes on whatever sum of money you put into the whole life policy instead of those plans.

beltim

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So if I understand this means:

  • Total premiums = $626.20 * (60 - 5) = $34,441 total paid
  • $110/year in expenses = about $500 total expenses
  • $114/year in insurance cost ($9.50/month) = $9.50 * (60 - 5) = $522 total premiums
  • Current cash value = about $35,000 (depending on interest rate)

Am I understanding this all correctly? So the current value is roughly $35k?

There are six months left.  I've paid in $33,814.80.  The current cash surrender value is $37,0457.74.

If you would have invested that same amount of money into an SP500 index monthly during that timeframe and bought a $10/month $250k term policy instead, you would have about $41,000 now. This represents an opportunity cost of about $4,000 to have that whole life policy, since you purchased it.

Sure, and if he invested it in Greek stocks it would have been worth something else.  Neither is a comparison to make.  This is comparable to a bond, not a stock.

And the effective interest rate he's gotten so far is 5.4% annually.  Pretty darn good for a bond.  Vagabond, where did you get this policy?  I haven't seen interest rates on whole life policies this good.

Vagabond76

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If you would have invested that same amount of money into an SP500 index monthly during that timeframe and bought a $10/month $250k term policy instead, you would have about $41,000 now. This represents an opportunity cost of about $4,000 to have that whole life policy, since you purchased it.


Term policy:  this is betting against a life insurance company, something I'm not smart enough to do.  I don't need the life insurance, but this policy is a outstanding tax-deferred (or tax-free, if I don't use it or only use it for long-term care) savings account.

Buy term and invest the remainder:  This is also Suze Orman and Dave Ramsey advice.  It's okay for some, but not for entrepreneurs and business owners that take calculated risks.

Opportunity cost:  True, but so what?  The thread was about life insurance.  I have plenty of other individual stocks, funds, and rental houses.


I couldn't find SP500 divided reinvested monthly return data to use, though, so I just used the SP500 monthly return data. If you were to include divided reinvestments the opportunity cost gets higher.


I use this DRIP calculator:  https://www.dividendchannel.com/drip-returns-calculator/.  Choose VOO, SPY, or another S&P 500 ETF.  May have to adjust the dates to after the fund's inception.


And in the off chance you aren't fully using tax advantaged space (401k, IRA, 403b, HSA, etc) this is considerably worse as you are also paying taxes on whatever sum of money you put into the whole life policy instead of those plans.

I paid 7.2% effective tax rate for 2015.  2016 will be even lower, perhaps even half that.  I think you will be hard pressed to find someone who tax-plans more than me.

Vagabond76

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And the effective interest rate he's gotten so far is 5.4% annually.  Pretty darn good for a bond.  Vagabond, where did you get this policy?  I haven't seen interest rates on whole life policies this good.

AAFMAA.  Have to be a vet to qualify.

The Happy Philosopher

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The vast majority of people who need/want life insurance should probably be buying level premium or annual renewable term life insurance. These are cheap and the market is incredibly efficient. They are not investments but hedges against death and loss of income. Without kids or dependents it is doubtful one would want/need it.

Kids + not FI = you should probably have some term life insurance.

I know the spouse can go back to work, yadda yadda, but the reality is if there is a stay at home parent it is usually the one with lower earning potential. Now that there is one parent there are child care costs. I'm not sure why anyone would not hedge that risk unless they were so low income it didn't really matter and the premiums would become a burden. It's just so cheap to do.

Whole life insurance is another beast. It is complex, hard to analyze and comes with many footnotes and things most people don't understand about it. Term insurance is dating, whole life insurance is a marriage with kids. Here is a good article (which is not very flattering of whole life). The only time whole life makes sense is if you want/need a permanent death benefit, otherwise the negatives seem to greatly outweigh the positives. I'm sure in some scenarios the asset protection or estate planning would tip the scales, but my sense is that does not apply to most people.

http://financialmentor.com/financial-advice/life-insurance/whole-life-insurance/19216

SeaEhm

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I have a life insurance policy for peace of mind.

If I pass away, I know that my wife will not have to worry about any financial issues while dealing with the loss of a loved one (I hope I am loved, haha)

Insurance offers peace of mind.  Extended warranties on cars offer peace of mind.  Some people find comfort knowing that in an extreme and unlikely case, things will be taken care of.

Are you that type of person?  No?  Then don't get life insurance. Yes? get life insurance. 

formerlydivorcedmom

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This isn't applicable to the OP's situation, but may be for others reading.

My husband and I are in our second marriages raising three elementary-aged children.  If one of us dies, the other will not receive Social Security survivor benefits, because we have no children together.   That means that we'll have to rely on our own incomes and savings.

I'm currently the sole breadwinner, and my husband is a full-time student/part-time SAHD.  We expect him to graduate in two years with a starting salary of about 1/3 what I make and then start moving up the career ladder, allowing us to retire in 2028 (at age 49).  We are currently about 25% of the way to FI.

If he dies, the two kids I get to keep and I will live just fine on my salary.  My savings rate will decrease, because I'll have to pay for day care now for now, and then, later, I won't have the increased savings potential we had calculated once he started working.  That would push my FIRE date out several more years.  We took out a $500k 10-year term policy on him so I don't have to worry about that.

If I die, he could live off our savings for quite some times; definitely long enough to finish school and find himself a job.  His retirement would be pushed way out, though, because, even in our long-term planning, I make most of the money.  We have about $900k of life insurance on me (combo of work-paid insurance and a 15-year term policy taken out 2 years ago). 

We pay about $100/month for the policies, which is worth it to me in terms of peace of mind.  I know too many people who died young, and if that were to happen to one of us I don't want the other's financial plans thrown off by too much.

StockBeard

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Interestingly I had a discussion with my father about this. He basically said I was stupid for not having life insurance, while living in the US (in France, where I'm from and where my parents live, apparently unions are powerful enough that pretty much any company will provide some sort of benefits in case of employee death)

He proceeded to give me the example of a cousin of my uncle, who was living in the US, lost his wife, and then burnt through all of his money despite being a millionaire, ended up as a "clerk in a gas station" to make ends meet.

I love my dad and he has been smarter than I am about money, for a long time. But I couldn't help but being frustrated at having yet again another statistically insignificant example of "I know a guy who knows a guy who...". That seems to always be the killer point people give in favor of insurance: "I knew a guy..." . I also can't connect how the guy lost his fortune, then apparently his job, and had to go back to a minimal wage salary afterwards. None of this makes sense and my father didn't give enough details: he was trying to convince me with a bullshit example and I'm sure he made up part of the story.

Bottom line, my parents are shit scared of the US because here it's every man for himself, while in Europe the community as a whole apparently handles it better.

I checked with my wife, it turns out I have a life insurance on my name, it is crazy expensive (~$5000 a year) which is somewhat justified by the fact that it's coupled with an investment scheme (with great returns of 1% or so...), something I now know is a "no-no" thing to do. To make things even more complicated, that policy was open in Japan (where my wife is from). Next time we go to Japan I'll have to cancel that thing, but am now considering opening some other form of life insurance, as I'm growing concerned that my plan for my wife and kids does not take into account the potentially insane taxes that could be taken from my brokerage account in case of death.

So, bottom line is I'm kind of back-pedaling on some of the stuff I said before. One can be FI, but what happens to your money at death could be complicated if you're in a situation like mine (expat), some of your "passive income" streams might not be so passive, and so your significant other could have trouble getting all the money back. So, being FI now is not the end of the calculation, one needs to understand what happens to the money in case of death (or disability == increased expenses), and if the current stash would cover it.

thd7t

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My wife and I have some term life insurance through work and some through a paid policy. I think of it as a gift to the other in the event of our death. A lot of people point out that their spouses could get by on one salary, but it would be nice to leave the survivor closer to/at FIRE. We also have 2 kids.

barbaz

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He proceeded to give me the example of a cousin of my uncle, who was living in the US, lost his wife, and then burnt through all of his money despite being a millionaire, ended up as a "clerk in a gas station" to make ends meet.
How is that even an argument? You could as well use it to argue against a life insurance: Yeah, sure, you'll get a lot of money but then you will burn through it and end up poor anyway, so why bother paying for it?

TravelJunkyQC

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I'm nowhere near FI, however, I have no dependents.

I have a rental condo with an investing partner - we both decided to forego life insurance since we are both able to cover the cost of the condo in full, even if it wasn't rented (we have a contract stating that in the event of my death, my shares are passed on to her freely - and vice versa).

I live in my partner's condo. We haven't combined finances, and neither is dependent on the other's income. He has life insurance for his condo, but I am not the beneficiary (his sister, who is still in uni, is - I am completely comfortable with this, as we had already discussed this).

The day he and I buy a house together, and/or have children, we will both have life insurance, but until then, I have enough assets to bury me and have a kick-ass funeral party, and leave a sizeable amount to my sister afterwards.

calimom

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My 37 year old husband died on his way home from work one day - he was killed by a drunk driver. We probably thought we were doing a lot things right financially: we had no debt, we had savings (hoping to one day buy a house in our HCOL area) and we had a $50K term life insurance policy as well as coverage of one year's salary from his employer. At the time I was a SAHM and our kids were 1,5, and 14.

Looking back, the $50K policy should have been $500K. The premiums would have been just dollars more per month. Our auto insurance coverage eventually paid out for an uninsured motorist for about $100K which did help a a quite a bit, as did the social security benefits our minor children where entitled to, and my two younger children will continue to receive for the next 9 years. I did move to a much more affordable town, both for family support and for financial reasons. With more money I would have likely stayed put. I used our savings toward a down payment on a house that would have been 4 or 5 times more expensive in the SF Bay Area but was pretty affordable where we moved. I used what insurance money we had to invest in rental property and a small business and have "paid" it back to my investment account. You outsource a fair amount of stuff when you're one parent down, like housecleaning, yard care, repair and such. Not to mention other odd things like play therapy for your kids and trips to places like Lego Land that you otherwise might not do, but do in any case because it might make your 5 year old smile.

It would have been better to have more insurance, and I'm not talking about cruises or wardrobe. One child is though college (on a full scholarship, she's smart!) and I have two more to go. I'd be lying to say I don't think about what could have been.
MMM has great insight, but is not always spot on for all of us. Sure, if you're FI at 30, have one child, perfect health and confident nothing bad will ever happen, don't buy life insurance. It's for chumps, right?

nottoolatetostart

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I am so sorry for your loss, calimom. I really have no words. I hope you and your children are coping. It sounds like you took a lot of good steps to do what you could.



Just wanted to pipe in that yes, we have 20-year term life insurance. We each have 750k, which would put either of us well over the line into FI at this point. It's $668 per year for both policies combined which I pay once per year, averaging about $55/month for $1.5MM in coverage. It seems affordable. Plus we have a 3 and 2 yr old at home. If something happened to both of us, our kids would have this money via a trust to use for education, school, launching into the world, etc. We will drop it here in a few years, so it is not calculated in our expenses needed during FI. We got these policies while we were "young" and newly married at 30. My husband also has a policy from his employer for about $150k, which would nearly pay off our mortgage.

Plus, since this premiums are paid with after tax dollars, the receipt of the $750K is a TAX FREE event. Any funds received by your employer may be taxed, since a portion of it is a employer benefit. So keep that in mind when planning too.

Before I found MMM, we had another term policy for an extra $1MM a piece, following the advice of many financial pundits who say 20-25X your INCOME. So you all saved us money when we scaled that back to 25X our EXPENSES.

Hope this helps!

People should not underestimate how it may be difficult to get insurance with family disease, disease/illness that you may have, etc. as you age. Do it while you are healthy to keep premiums low.